Global Representation
116 The Disclosure Document states:
Global Pets Products Pty Ltd is one of the Approved Suppliers. The company is owned by Gary Diamond who is also its shareholder. The franchisees are not required to purchase goods from this company.
117 The contention of the applicants is that, in reality, all stock was supplied by or through Global and invoiced by Global. They say that there was no approval process for unapproved stock or if there was that it was controlled by Global. There was no evidence that a decision had been made to approve any unapproved products. Consequently, they contend that the representation was false or misleading or deceptive because Pampered Paws was required to purchase its stock from Global.
118 The applicants point out that the Franchise Agreement expressly obliged Pampered Paws not to change or modify any of the products, not to sell any products other than products approved by PPQ (clause 7.24), to obtain all stock (as defined) only from PPQ or its approved suppliers (clause 9.1(a)), and only to use or sell stock approved in writing by PPQ (clause 9.1(b)).
119 It is apparent, therefore, that whatever the representation, Pampered Paws was in effect obliged to obtain its stock only from PPQ or its approved suppliers.
120 Moreover, the Franchise Agreement required Pampered Paws to observe and comply with specified manuals (clause 7.30). One of the manuals is called the Instruction Manual. Relevantly, it prescribed the mix of stock to be maintained by Pampered Paws at material times. There was an Approved Stock List for the purposes of clause 9.1(b) of the Franchise Agreement. I find it was in essence the Global catalogue, although the evidence shows there were also lists of approved suppliers. It was provided to Pampered Paws through Ms Donnelly in the course of training at Melbourne in early February 2006. No other document was identified which might fit that description. I acknowledge that the respondents disputed that there was such a document as an approved stock list, although there is no dispute that the products in the Global catalogue were approved stock. There is no dispute that the stock referred to in the Global catalogue, and the categories of stock referred to in the instruction manual, was stock approved in writing for the purposes of clause 9.1(b) of the Franchise Agreement. I think the Global catalogue largely served the function of being the Approved Stock List.
121 The respondents' answer is a straightforward one. Insofar as the Global representation is based upon clauses 7.5, 7.24(b), 9.1(a) and (b) and 9.5 of the Franchise Agreement, the applicants' assertion is not correct. The Franchise Agreement operates according to its terms.
122 Secondly, the respondents say that there is no pleading that there was any oral direction to the applicants, in particular Ms Donnelly and Ms Campbell, either during the course of training or subsequently that they must use Global products. It is curious that it is not pleaded, given the emphasis that was attributed to evidence to that effect in the course of the applicants' case. They both assert that, during the course of training, they were told that Pampered Paws must acquire only Global products.
123 Even though that was not pleaded, it is a significant contested section of the evidence. Upon careful analysis, I do not think that the evidence of Ms Donnelly and Ms Campbell goes so far as to support the fact that they were told that Pampered Paws must acquire its products or stock from Global. It is unclear from the evidence of Ms Donnelly whether she claims to have been told that Pampered Paws had to use Global for all its stock or as its main supplier. Ms Campbell says she was told that Pampered Paws should only purchase stock from Global or from approved suppliers. That is consistent with the Franchise Agreement. As clause 9.1(a) of the Franchise Agreement says, Pampered Paws must stock products supplied either by Global or approved suppliers, so there was a range of options available to it. It is also significant to note that, on Ms Donnelly's evidence, she regarded Global as the buying arm of the Pets Paradise group, and its capacity to provide products was regarded as significant by her. Pampered Paws, Ms Donnelly and Ms Campbell all signed the Global Supply Agreement and Global Credit Application during the course of training. Thirdly, the fact is uncontested that, within a few weeks of commencing operating the Pampered Paws business, that business was stocking unapproved products and continued to do so without the approval of PPQ or Global for many months. By about the end of October 2008, almost all the Pampered Paws stock was unapproved. Despite that, Pampered Paws was permitted to continue to operate the Pets Paradise franchise over that time. There were occasions when representatives of PPQ, in routine consultations, expressed concern to Ms Donnelly or to Ms Campbell about the fact that Pampered Paws had such a range of unapproved stock. That, however, did not result in any action asserting a breach of the Franchise Agreement.
124 Pampered Paws also relies on the Instruction Manual and the Store Manual and the Approved Stock List. I have briefly referred to the contents of the Instruction Manual above. In my view, neither the Instruction Manual nor the Store Manual prescribe either the mix of stock to be maintained by Pampered Paws or other franchisees or more importantly require that stock be acquired only from Global. The Instruction Manual sets out types of products and services recommended to be sold or provided by franchisees. The Store Manual sets out the ideal floor plan and ideal wall layouts for Pets Paradise stores, including details as to how to best locate and position certain products generally stocked by Pets Paradise stores. The "Approved Stock List" is in fact in essence the Global catalogue. There are a range of products approved for sale by Pets Paradise franchisees in relation to or beyond Global products. They extent beyond livestock, plants, fish tanks, dog tags, collars and leads and produce as asserted by the applicants.
125 Evidence on the topic was given by Christine Beed, the Pets Paradise Business Manager. She initially worked as a Pets Paradise franchisee in Melbourne before becoming employed by the group itself in about July 1993. She was involved in its training program. She participated in the training program with Ms Donnelly and Ms Campbell in early February 2006. I accept her evidence as reliable. She struck me as honest and direct. Her evidence was not seriously challenged in cross-examination. She also impressed me as a thorough and careful person. Her check list, prepared and completed during the course of the training, demonstrates the extensive documentation she provided to Ms Donnelly or Ms Campbell in the course of the training, and her "New Store Training Checklist" confirms that she completed that training in accordance with her usual practice. Relevantly to the present issue, one of the documents which Ms Beed provided to Ms Donnelly and Ms Campbell during the training was an approved supplier's list. The list in evidence is apparently a slightly more contemporaneous list than that provided to the Ms Donnelly and Ms Campbell at 2006 during their training, as it has some pages dated 2007 or 2009. It is an extensive list of approved suppliers for a range of products. It appears that it was updated form time to time. However, the categories of product are still relatively limited. I note that one of the documents provided and discussed was a Global authority form to purchase premium and exclusive products. I accept Ms Beed's evidence that she discussed with Ms Donnelly and Ms Campbell the appropriate stock for their proposed store. She provided them with stock orders for the stock which had been discussed. They were then able to make a final decision about that later on. They did so and made a final Global order. The first stock order included Global products and products from four other suppliers.
126 During the training, and in the short period thereafter, Ms Beed discussed with Ms Donnelly and Ms Campbell the names of some independent suppliers and they were invited to deal with those suppliers direct.
127 There is a dispute as to whether Ms Campbell was told by Ms Beed that Pampered Paws must purchase stock only from Global or approved suppliers. I do not accept that they were told that in such uncompromising terms. Firstly, I accept Ms Beed's evidence that she did not say unequivocally that Pampered Paws must purchase only Global stock. I accept her evidence that she discussed with them during training that items such as livestock, fish tanks and produce should be purchased from other sources. I also accept that she discussed with them the process by which other stock, which they planned to acquire for Pampered Paws and which was not approved stock, could be submitted to Global or PPQ for its consideration. There was also some discussion with them about there being limited approved suppliers close to the Pampered Paws shop at Burleigh Heads, and that they might consider acquiring stock from other reputable local suppliers.
128 The Court also received evidence from Colin McDonald, the Sales Manager for Global. I also was impressed with his evidence, which was given in an honest, direct and uncomplicated manner. He too participated in the training session for new franchisees at the commencement of February 2006. There is some difference in his evidence from that of Ms Campbell and Ms Donnelly about the extent of the training in relation to Global processes, including new products and allocations, its credit procedure, the ordering procedures, freight, the Global Stock Updates and Choice Orders, as well as the tour of the Global warehouse. I do not regard much of the dispute as of significance. Obviously, the knowledge of the trainers on the one hand and of the new franchisees on the other is quite different so it is entirely understandable that Ms Campbell and Ms Donnelly apprehension of what was conveyed or the manner in which it was conveyed or the roles of individual people in the process of the training program might be a little blurred.
129 One of the forms introduced by Ms Beed was the "New Product Submission Form" to seek approval to any proposed new product line. It was Mr McDonald's responsibility, as the Sales Manager for Global to address such documents. He referred to a number of requests from franchisees seeking approval to stock various items in the course of his evidence. So far as the records of Global are concerned, since February 2006, there are only two possible requests on behalf of Pampered Paws to stock a new product in accordance with that process. They are an email dated 2 May 2006 and an email dated 20 April 2010. A proposed new product, once approved, was given a Global product code.
130 The applicant's case is based upon a particular reading of the relevant terms of the Disclosure Document.
131 It may be accepted that much of the stock listed in the Global catalogue could be obtained from other approved suppliers. It may be accepted that, on the evidence, most approved stock was supplied by Global. It does not routinely follow that the Global representation is misleading and deceptive because Pampered Paws was contractually required to purchase stock from Global. It is really a matter of emphasis.
132 I find that Pampered Paws was not required to purchase all of its stock from Global. It could purchase stock from other suppliers, provided it was approved stock. There was a range of products which was approved stock and which could be acquired from other suppliers. There were a range of approved suppliers for stock, who could be used in a number of instances to acquire stock which was also on the Global catalogue. There was a procedure by which stock acquired, or proposed to be acquired, from other suppliers that could be submitted to Global for its approval and could become approved stock after consideration by Global. That procedure was rarely followed by Pampered Paws. Once the approval was given, if it was, that stock could be given a Global product number for the purposes of other systems and could be acquired from the other supplier. In addition, on the evidence, Pampered Paws in fact acquired stock from a range of other suppliers than Global without any assertion being made that it was in breach of the Franchise Agreement, to the point where much of its stock within two years of its operations was not acquired from Global. Nevertheless, it continued to operate as a Pampered Paws franchise.
133 In those circumstances, in my view the Global representation is not made out.
134 Reliance was placed upon the Global Supply Agreement itself. It sets out the terms and conditions under which Global would supply products to a franchisee. The Global Supply Agreement does not oblige a franchisee to acquire products only from Global.
135 The evidence also indicates that most franchisees, if not all franchisees other than Pampered Paws, acquired most of their stock from Global. That too does not demonstrate that the representation is misleading or deceptive.
136 I adverted above to the evidence of discussions between Ms Campbell on the one hand and representatives of Global or the Pets Paradise group on the other in which, notwithstanding the documentary material, it was asserted that Pampered Paws must acquire all its products from Global. The evidence does not go that high. Ms Campbell's evidence was that she was told that most of its stock should be or must be acquired from Global. She also gave evidence of some threats of consequences if Pampered Paws did not use Global stock. I am not persuaded that such threats were made. They were not admitted by any of the witnesses called by the respondents, and I have no reason to reject their evidence. As I have remarked, I generally found their evidence impressive.
137 On the other hand, there is evidence from both Ms Donnelly and Ms Campbell, that, during the training, they had each been told by Ms McDonald, by Hayley Young and by Mr Diamond that Pampered Paws had to use Global for all or most stock. It is clear that Ms Beed, Mr McCarthy and Mr Paul Collishaw told Ms Donnelly and Ms Campbell that they should use Global for stock, but I do not accept that they said there would be consequences adverse to Pampered Paws if they did not do so, and I do not accept that they excluded the prospect of buying stock from other approved suppliers or excluded the prospect of Pampered Paws from getting approval to acquire stock from other suppliers, or from getting externally acquired stock approved. The fact is that Pampered Paws was not provided by Global or the Pets Paradise Group with codes for products supplied by non-approved suppliers, but on the other hand they did not follow the procedure for that coding to be given except (during the relevant period) on one or two occasions.
138 Mr Collishaw is a Pets Paradise franchisee in Doncaster, Victoria. He also has another interest in another Victorian franchise of Pets Paradise. He also manages two Pets Paradise stores in Victoria for the Pets Paradise group. He is one of its training consultants. Mr Collishaw gave evidence that Global is the main, but not the sole, supplier from which his stores purchase their stock. As to the assertion in Ms Campbell's evidence that Mr Collishaw had said that "all" stock would come from the Global warehouse, he disputes that he said that during training. He was not cross-examined on that. I do not think that he said that in the precise terms asserted. It is inconsistent with the practice he had in relation to the Pets Paradise businesses with which he was involved. I accept that he said to Ms Campbell words to the effect that new franchisees should generally acquire stock from Global or approved suppliers, because that provides franchisees with better pricing and profit margins. That was in fact his state of belief at the time. I do not accept that he excluded the purchase of stock from other approved suppliers, because that is what he did at the time. Nor do I accept the fact that he did not leave open the prospect of obtaining non-approved stock and seeking approval for it.
139 I have noted Mr McCarthy's role above and his contact with both Ms Donnelly and Ms Campbell during their training period. He accepted that, during that time, he told them that they should purchase stock only from Global or from approved suppliers. He confirmed that in his oral evidence. He also confirmed that, from the Pets Paradise Group perspective, it was desirable for only approved stock to be held by franchisees. He acknowledged that area managers routinely visited franchisees, and that from time to time there was discussion between the relevant area manager and either Ms Donnelly or Ms Campbell that Pampered Paws should be focusing on removing unapproved lines from its shelves.
140 His evidence is consistent with the evidence of Kelly-Ann Illingworth, who at the time was working for the Pets Paradise Group as Area Manager for Queensland. She occupied that position between about April 2005 and March 2008. In that role she visited the Pampered Paws shop from time to time. She assisted in the stocking of that shop and its fit-out prior to its opening. She understood, at all material times, that franchisees were required to use either Global or an approved supplier for stock. She explained to Ms Donnelly and Ms Campbell from time to time the need to get approval for non-approved stock through Global, and it would then be up to Global as to whether the proposed stock was approved stock. She reiterated that message to them on at least on one or two occasions. She was emphatic that Pampered Paws should get prior approval before stocking unapproved products. Mr Diamond himself confirmed that clause 9.1 of the Franchise Agreement requires franchisees to sell only approved stock either from Global or from other approved suppliers. He agreed that product codes are not available through the IT Visions System for non-approved stock. Product codes were only provided to approved stock once the approval process had been completed.
141 The point made in these submissions on behalf of the applicants is that, in reality, the respondents required rather than expected franchisees, including Pampered Paws to acquire goods only from Global. I do not accept that. In general terms, I accept that the respondents required rather than expected franchisees to acquire goods from Global or from other approved suppliers, and not to stock products which were acquired other than from Global or an approved supplier and which had not previously been approved by Global. It is consistent with that finding that the respondents would, and in particular Mr Diamond would, be cautious about a prospective franchisee who did not want to sign the Global Supply Agreement. It was certainly in contemplation that the majority of products held by a Pets Paradise franchisee would be acquired through Global, and that the Pets Paradise group should control what products were held by Pets Paradise franchisees by approving products which were not available through Global or existing approved suppliers. The element of requirement is confirmed by Ms Illingworth in her statement that franchisees were required to use Global or an approved supplier of stock.
142 The documentary material, in particular the Disclosure Document and clause 9.1(b) of the Franchise Agreement, make it plain that a franchisee is expected to apply in writing for approval to purchase goods from unapproved suppliers, and that PPQ is not obliged to approve the purchase of goods from unapproved suppliers. That may be seen as a means of quality control, or as a means of ensuring a finite series of options for particular categories of stock, or (as the applicants contend) to bring Global into the acquisition process to acquire profit by its wholesaling margins - and perhaps inappropriately high margins - for the supply of that stock.
143 It does not follow, as the applicants contend that there was no bona fide approval process. The approval process was said to be a sham. That is inconsistent with the evidence of Mr McDonald in particular as well as that of Mr Diamond. It is not a process which was tested by Pampered Paws in any meaningful way. There were procedures in place for that purpose.
144 The concluding submission of the applicants is that clause 9.1(c) of the Franchise Agreement is misleading and deceptive because it disguises the reality that most approved stock was supplied by Global and that Global was not simply one among a number of approved suppliers, but was the principal supplier. That is not the representation complained of. In my view, the Disclosure Document does not say that. The reality is that franchisees were formally required to stock only approved stock, which could be acquired from Global or from other approved suppliers, but which was principally supplied by Global. It is not proven that the approval process is "a sham" or that it disguises the reality that Global was the principal supplier. Global was, and was understood by both Ms Donnelly and Ms Campbell to be, the principal supplier of product at all material times. The evidence said to support the proposition that the approval process for non-approved products was a sham is said to be indicated by the lack of documentary evidence of the approval process, the fact that in the Melbourne training franchisees were not informed about the approval process, and the difficulty in obtaining product codes for unapproved stock. I do not accept that during the Melbourne training period, Ms Donnelly and Ms Campbell were not informed about the need to secure approval for unapproved stock, or that there was a process for doing so. I accept that there was a process for doing so and that they were told about it. There is no evidence which persuades me that applications for approval for unapproved stock were routinely disapproved either to secure benefits to Global or for any other reason. I do not accept that the approval process in place was a sham.
145 It is certainly accurate to say that the evidence of the approval process being adopted was scanty. Mr McDonald's evidence was that there were some, but few, requests from franchisees for approval to stock various previously unapproved products. He produced documentary evidence to support those occasions. They related to a period of time after this proceeding was commenced. He also gave evidence that approvals were not infrequently sought for new products from suppliers and manufacturers of products to get onto the Pampered Paws list. He would consider those requests, the quality of the product, the cost to Global and any recommended retail price, and provide the information to Mr Diamond for a decision. Mr Diamond would then decide whether to approve the product for inclusion on the Pets Paradise approved products list and determine a price at which Global would then charge franchisees for the product if the product was stocked and on-sold by Global. It does not follow that Mr Diamond would put a price on the product which would, in effect, leave the benefit of the new product in Global's margin rather than a significant margin for the franchisee. The product, once approved, could be obtained through an approved supplier. I draw from Mr McDonald's evidence that there was a process available for seeking the approval of the new product was available and when it was adopted it was properly considered by him. The approval process, once granted, would result in a product code. It would also result in the opportunity for the product to be acquired either from Global or from the supplier. That evidence was confirmed in general by Ms Beed, and Ms Illingworth and Mr McCarthy. There was little documentary trail adduced in evidence to establish the implementation of that process, but I do not accept that the process was a sham for that reason.
146 There is no direct evidence from Mr McDonald or Ms Young (who assisted in the training on this topic) or Ms Beed, that the detailed procedure including the new product application form was specifically discussed at the training session, although the opportunity to seek the approval for new products was certainly pointed out. The new store training checklist of Ms Beed does not cover the approval process for unapproved stock as a discrete subject matter. Nevertheless, I accept their evidence, in preference to that of Ms Donnelly and Ms Campbell for the reason already given (namely that new franchisees were expected to acquire and absorb a great deal of information during the training session and it may not have all registered with them) that there was a new product approval process available to them, and I accept that Ms Illingworth in the course of her inspections raised the use of that process with them. I accept Mr McCarthy's evidence that both Ms Donnelly and Ms Campbell were at least generally informed about the approval process during their training.
147 As to the third matter, the difficulty in obtaining approval for product codes, in my view the documentary evidence discloses that Pampered Paws barely sought to seek approval for product codes for its then unapproved stock, and that there is no reason to infer in the circumstances that it was difficult to obtain approval for product codes for unapproved stock provided that stock was, in the judgment of Mr Diamond, appropriate for use in Pets Paradise stores. There is no reason why he should not approve appropriate new products. There is an economic reason (as senior counsel for the applicants pointed out) why Global might then wish to provide the opportunity to acquire those products through it, rather than through an independent provider. However, that is not a reason why there should be difficulty in obtaining approval for product codes for new products if they were otherwise appropriate. I have not overlooked the evidence of an email chain concerning the "Vet Lines", but I do not think that evidence takes that point significantly further.
148 I specifically do not make the finding as requested by the applicants that the Global process was to provide a product at a significant mark-up from its cost to Global and at the expense of franchisees. That is not consistent with other evidence from franchisees, such as was given, for instance from Mr Robert Wallace.
149 It is also important to bear in mind that there is a difference between a request for a product code for unapproved stock and a request for approval of particular stock. The email chain relating to the "Vet Lines" was not a request for approval but a request for a product code in relation to existing unapproved products. As I have found, Pampered Paws made only one or two requests for the approval of unapproved products. The applicants say that they did not do so because they had been told by Mr Diamond, during the training, that they could simply go and acquire such products as they wanted from such sources as they wanted independently of the Pampered Paws Group processes or systems. I have previously indicated that I do not accept that Mr Diamond said that, nor that such an agreement was made (bearing in mind that it was not pleaded).